Der Spiegel Interview with George Soros
August 15, 2011
This week's Outside the Box is in the tradition of showing the other side of the argument. Normally, anything George Soros says or does politically has my blood pressure up about 20 points. Yet, I posted another piece of his today in Over My Shoulder – and then ran across this longer piece from Der Spiegel. Note this is from a dedicated Europhile wanting to save the euro. He succintly outlines what must be done if it is to be saved, and does it as well as anyone. (I know that among my readers there are both likers and haters of Soros, but as an observer of markets he is to be respected. And this is an article in which his acumen is in evidence.
I refer you to last week's
regular letter (one of my more important ones: http://www.johnmauldin.com/
We find ourselves in a binary world. Either Europe goes to a fiscal union with the various countries losing control of their budgets, or the Eurozone breaks up. As I recently wrote, we must not underestimate the commitment of the European elites to do whatever it takes to hold their project together. Neither must we underestimate the ability of voters to change their leaders. This is a very volatile situation with far more implications than our subprime problem.
I continue to say that a euro crisis will lead to a recession (or worse) in the US. Attention must be paid. Soros lays out the Euro-elite agenda. I suggest you read.
Your euro-skeptic analyst,
Breakfast with Dave
August 8, 2011
The question we will ask ourselves in 20 years is, “Where were you when they downgraded the US and the Fed?” This week’s Outside the Box is from David Rosenberg. He has made his letter public and graciously given me permission (at 34,000 feet ) to send it to you.
I thought about writing an immediate response to this weekend’s events but decided to wait and meditate on what has transpired. Clearly, we are at the beginning of the Endgame. And that saddens me. The events of the weekend were hotly discussed at the Shadow Fed meeting in Maine. My youngest son, Trey, was paying attention this year. Last night he said, “Dad, it is good for you that you are right with your book, but I don’t think it’s good for the rest of us.” Out of the mouths of babes.
The takeaway here is that this is just the beginning. We are in for a very bumpy ride. And the flight attendant is telling me to turn off the computer, so I will hit the send button.
Your sad that he called this analyst,
Germany’s Choice: Part 2
July 28, 2011
For today's special-edition OTB, let's turn our fiscal eye across the pond to all that's going haywire in Europe. But not the continent's banking crisis, per se. Today's piece takes a broad look at who's really running the show. I'll give you a hint: they've done it before, and it wasn't too long ago. The folks at STRATFOR (a global intelligence publication) have spent the better part of two years saying that Germany will run Europe. The newly redesigned EFSF (European Financial Security Facility) can be considered concrete evidence of such.
From Berlin's point of view, the Eurozone is its sphere of influence, and its preservation is in Germany's national security interest. It's a new Europe, where Germany is not just the checkbook anymore, but holds some reins.
I'm sure you'll find this piece as thought-provoking as I did. Investors are always talking about geopolitical risk (but you and I talked about it first here); and if you're looking for geopolitical analysis and forecasting, I highly recommend you check out STRATFOR. OTB readers can get a hefty discount on a STRATFOR subscription, plus a free copy of (warning: more self-promotion) my book Endgame.
Your now craving schnitzel analyst,
The Cognitive Dissonance of It All
March 7, 2011
I get a lot of client letters from various managers and funds, as you might imagine. I read more than I should. But one that shows up every quarter or so makes me stop what I am doing and sit down and read. It is the quarterly letter from Hayman Advisors, based here in Dallas. They are macro guys (which I guess is part of the magnetic attraction for me), and they really put some thought into their craft and have some of the best sources anywhere. So today we take a look at their latest letter, where they cover a wide variety of topics, with cutting-edge analysis and sharp insight. I really like these guys, and suggest you take the time to read the entire letter.
Today (Tuesday) is the day I want you to start buying Endgame. The early reviews on Amazon are quite gratifying – writing a book is damn hard work, so when people say nice things it just feels good. Have a great week! Now let’s jump into the Hayman client letter.
Europe: The State of the Banking System
July 8, 2010
We're bombarded with information from the minute we wake up until the second we fall asleep. I was watching a news network last night for 45 minutes and the exact stories started coming back around. Nothing new to report, but the same topics on repeat, with the rare nominal development.
When I need something different (and relevant to me), I go to STRATFOR.com. They provide deep insight and explanation of events the networks can't begin to tackle. Today I'm including an extensive article on the banking situation in Europe. Enjoy, and sign up for their free email list to receive weekly reports and special offers.
Print baby, print ... emerging value and the quest to buy inflation
June 14, 2010
This week I thought I would give you an Outside the Box with a more European flavor, as I am in Tuscany at the moment and on to Paris later this week and then back here for a working weekend with partners. Life is tough. :-)
Dylan Grice of Societe Generale (based in London) is fast becoming one of my favorite writers. This thought-provoking piece makes us meditate on whether central banks will print money in response to the fiscal crisis in the developed world countries. I am not certain that all central banks will print with abandon, BUT we need to think about what happens if they do.
I need to hit the send button now, as we are off to watch Italy in the World Cup in a little village (Montisi) where they have set up screens in the town square. My first connection with European football live with crazy fans and all! Should be fun!
Your under the Tuscan sun analyst,
Germany, Greece and Exiting the Eurozone
May 20, 2010
The cause célèbre these days is the potential reconstitution of the eurozone: ie, Germany leaving it, or Greece getting kicked out. To look a little deeper, today I'm sending you STRATFOR's take on these two scenarios. STRATFOR explores the geography of the continent and the historical context of the EU to understand what a German exit or a Greek expulsion might mean for the rest of the region.
After you read the article, sign up here to receive more STRATFOR global intelligence reports like this one.
The Global Crisis of Legitimacy
May 6, 2010
From my friend George Friedman, founder & CEO of STRATFOR, here's my newest favorite quote concerning economic recessions: "Like forest fires, they are painful when they occur, yet without them, the forest could not survive. They impose discipline, punishing the reckless, rewarding the cautious." The thin line of where risky becomes reckless is something I'd like to focus us on today. No matter the risk-level of your portfolio, if you are reading this you are probably smart enough to know that when you play with fire you may get burned. You have to know how to look for smoke, or signs of a potential catastrophe, so you know not to grab the doorknob with both hands.
I'm including George's discussion of the contributing facets of a recession, its inevitability and the idea of risk. As if the title won't intrigue you to begin with, take my advice and give "The Global Crisis of Legitimacy" a read. STRATFOR uses its signature analytic approach to decipher today's issues, applying historical context ranging from Adam Smith to the Lehman Brothers. Also, join their mailing list to receive two weekly intelligence pieces, and find that fire before your next investment opportunity comes along.
Was the Demise of the USSR a Negative Event?
May 5, 2010
Let's have a thought game. What if the Eurozone breaks up? My friend and very serious philosophical thinker Charles Gave (of GaveKal) thinks that would be a positive event. To quote his conclusion:
"But we return to the most simple of questions, namely: Was the end of the USSR a negative event? When Americans stopped wasting capital building empty condos in Florida or Arizona, was that bad news? If, like us, our reader answers "no" to the above questions, then the Greek crisis should be seen as a reason for hope, rather than despair."
Now, that is a truly Outside the Box proposition and one which I found very compelling. His partner, Anatole Kaletsky, elsewhere argues that the ECB will enlarge their mandate to try and save the day by printing enormous sums of money, ultimately making things worse.
The team at GaveKal gave me permission to share this with you, as I think it deserves a wide audience. Warning: the first part is philosophical in nature. You will need to think through it. This is not one for speed reading. But if you grasp what he is saying, I think it will give you a major insight into the plight that is now engulfing Europe. Note. Even though Marc Faber calls the GaveKal team "euro perma-bears" GaveKal is mostly quite bullish on everything else. They always seem to find the bright side of the street to walk on, or at least a few spots in the sun in which to sit.
Read this and learn why the break-up of Europe might be a bullish event. As I said, Outside the Box is for ideas that challenge the status quo, and this, if anything, does just that.
Germany: Mitteleuropa Redux
March 25, 2010
With the establishment of the euro in the 1990s, speculation was abundant on how things would play out. In the last fews months we've seen that cheap credit for the Club Med countries came at a price, and now it's time to look at who will come out on top after the current economic crisis. There is a term for this type of global analysis: geopolitical intelligence. STRATFOR, a global intelligence company, uses geography, open source data, HUMINT, and a deep understanding of global affairs to produce analysis with a geopolitical perspective.
Today I'm including their take on Germany's changing role in the EU. But it is only a small sample of all they provide, so I encourage you to sign up for their free mailing list or become a member for greater access to features including Quarterly and Annual Forecasts that will put you ahead of the game.
Has Germany just killed the dream of a European superstate?
March 22, 2010
While the US was focused on the health care drama over the weekend, over across the pond events are rapidly deteriorating in euro land. For this week's Outside the Box I offer two columns, one from the Financial Times and another from the London Telegraph. Both describe the problems that the eurozone faces. It is not pretty.
I was sent this note from a Steve Stough who translated this from a German TV news show' It is a nice set-up for the two short columns.
I was reading an interview with Germany's most-quoted economist and then, all of a sudden, his face pops up on a TV show (a panel discussion on Germany's version of Fox Business News) at the same time, so I paid close attention. Hans-Werner Sinn's remarks are apparently listened to as closely as are the Federal Reserve Chairman's remarks in the US. He said:
- The Greek drama will have a 'frightful' ('schreklich') ending no matter which course of action is taken. The objective is to avoid having a Greek default trigger another banking crisis across the EU.
- The EU member states are too financially fragile to take on any flaky Greek debt. The actual Greek deficit is running at 16% of GDP, not 12% as previously reported. Greece is in a deepening retraction, not a recovery, as previously claimed. [Germany's social security, welfare, unemployment, and health care entitlement programs are all running cash-negative or soon will be, but that is another subject entirely. Angela Merkel has a committee established to work on tax reform, meaning tax rate reductions - Steve].
- There are three bad alternatives. He recommends #3 (effectively, default):
- A Franco-German bailout. Dr. Sinn believes this is impractical and the worst of the three alternatives because the amounts required for an effective bailout are so large that it would trigger a jump in yields on French and German sovereign debt which would result in a Euro-wide financial crisis. In addition, Angela Merkel said 'no,' and so did Guido Westerwelle (her coalition partner and foreign minister).
- IMF loans. Dr. Sinn believes that this would accelerate the Greek economic contraction with a dramatic deflation of wages and prices, which could lead to civil war, revolution and a political destabilization of the area.
- Exit the Euro zone, revive the Drachma, re-denominate the sovereign bonds in Drachma, let the Drachma collapse, and rebuild after the collapse, largely on tourist remittances Assuming a small amount of domestic (internal) default, this would be the least-painful to the Greek populace, but German banks and investors would lose approximately $38 Bn in bond investments +/- what can be recovered after the Greek economy recovers. Eventually, Greece would be allowed to re-join the EU.
- A Franco-German bailout. Dr. Sinn believes this is impractical and the worst of the three alternatives because the amounts required for an effective bailout are so large that it would trigger a jump in yields on French and German sovereign debt which would result in a Euro-wide financial crisis. In addition, Angela Merkel said 'no,' and so did Guido Westerwelle (her coalition partner and foreign minister).
- Formation of an EU monetary fund is out of the question, he believes, because it requires treaty modifications that might take many years to pass.
- As an aside, he said that if German tax rates are not lowered, that Germany will slide back into recession.
Steve Stough
As a quick aside, I know I said two weeks ago that I would do an assessment of the affect of taxes on the US economy. I decided to hold off until we can see what the health care taxes rally look like, rather than guessing. I will get to it, as I am quite curious as to the total level of the tax increases.
Now, to this week's OTB.
The European Union Trap
March 9, 2010
Let's start with the conclusion to today's Outside the Box:
"The underlying principle flows from the financial balance approach: the domestic private sector and the government sector cannot both deleverage at the same time unless a trade surplus can be achieved and sustained. Yet the whole world cannot run a trade surplus. More specific to the current predicament, we remain hard pressed to identify which nations or regions of the remainder of the world are prepared to become consistently larger net importers of Europe's tradable products. Countries currently running large trade surpluses view these as hard won and well deserved gains. They are unlikely to give up global market shares without a fight, especially since they are running export led growth strategies. Then again, it is also said that necessity is the mother of all invention (and desperation, its father?), so perhaps current account deficit nations will find the product innovations or the labor productivity gains that can lead to growing the market for their tradable products. In the meantime, for the sake of the citizens in the peripheral eurozone nations now facing fiscal retrenchment, pray there is life on Mars that exclusively consumes olives, red wine, and Guinness beer." - Rob Parenteau, CFA
Let me state upfront that this is not the easiest to grasp Outside the Box that I have sent you. But if you can get what Rob is saying, you will understand why the problems facing the world, and especially Europe, are so difficult. Everyone cannot export their way out of this crisis. Someone has to actually run a current account (trade) deficit.
My suggestion is that you read this once through, and then read it again. If you see where Rob is going, it makes it easier to understand the second time. Warning: Rob Parenteau is an Austrian economist. In many circles, what he is saying is controversial, if not at least counter-intuitive. But it makes us think, which is the purpose of Outside the Box. If I get a response that is robust and thoughtful, I will run it in the future. The problem that Rob articulates is the center of the problems we face. There are no good or easy choices, as I have been writing for a log time.
Rob Parenteau, CFA, is the sole proprietor of MacroStrategy Edge and editor of The Richebacher Letter. He also serves as a research assistant to the Levy Institute of Economics. For those interested, you can subscribe to The Richebacher Letter at https://reports.agorafinancial.com/RCH497ControlPromo/LRCHL300/landing.html (yes, more hyper marketing copy, but that is the link if you want his letter.)
An Attempt to Think Through the Greek Crisis
March 1, 2010
Today I am sitting listening to Ralph Merkle lecture on nanotechnology, part of a 9-day-long series of lectures on how accelerating change in technologies of all types will affect our world. 15-hour days and intense discussions are stretching my brain, but I still have to make sure you get your Outside the Box. Fortunately, I came across today's OTB last week from my friends at GaveKal, who offer a way to think about the Greek crisis and what it means for all European bonds.
There are a lot of allegations about manipulation of European bonds. It's those nasty traders. GaveKal shows us data that bond yields are actually quite logical, given the debt of various countries. But they also warn us, as part of their conclusions:
"As of today, there seems to be no additional risk premium related to the possible dislocation of the Eurozone. Clearly, this possibility would have such devastating effect on world financial markets that investors cannot even think of it (even if many talk about it)."
I suggest you read at least the beginning and then the end of this piece, even if the data makes your eyes glaze over. (I must admit the data made me feel all warm and fuzzy, but then I am somewhat of a wonk.)
Have a great week. I am getting overwhelmed here in California, learning about the future. It is going to be amazing, even if our bonds drop in price. We will live in what may be the most interesting and exciting period of human history. What a contrast between the financial markets and what the scientists continue to amaze us with. It is one of the reasons I think we Muddle Through, in spite of our rather negative economic environment.